Lesson 5.1 · 1 of 5 · Exchanges, indices and orders
What is a stock exchange and how does it work? Lesson with exercises
A stock exchange is the market where people who want to buy shares meet people who want to sell them. The exchange does not set the price: it comes from their orders, at the level where a buyer and a seller agree. You reach the exchange through a broker.
Terms in this lesson
- Stock exchange
- The market where stocks, bonds and ETFs are bought and sold, under strict rules.
- Order book
- The list of all buy and sell orders waiting on the exchange.
- Broker
- The firm through which you buy and sell stocks, ETFs and other investments.
- IPO
- The moment a company sells its shares on the stock exchange for the first time.
Opening question
Who sets the price of a share on a stock exchange?
The exchange only matches orders. The price is the last level at which a buyer and a seller traded. The company sets a price only when it sells new shares, for example when it lists (IPO).
It does not matter if you get it wrong: trying first helps you remember.
Who buys and sells on a stock exchange
Definition
What is a stock exchange?
A tightly regulated market for shares, bonds and ETFs.
You never go to a stock exchange in person. You place an order with your broker, and the broker passes it on. There your order meets orders from other people and from institutions all over the world. The exchange enforces the rules, matches the orders and publishes the prices.
- You place the orderin your broker’s app
- The broker sends it to the marketin a fraction of a second
- The exchange matches it with an opposite ordera buyer with a seller
- The trade shows in your accountthe shares go to you, the money to the seller
They buy and sell through brokers, usually in small amounts.
They move large sums. Pension funds and ETFs buy shares every day on behalf of millions of savers.
Firms that constantly show a price to buy and a price to sell, so there is always someone to trade with.
Match the terms
Tap a term, then its definition.
Each has a different job. The exchange never takes your money or holds your shares: your broker does that, through your account.
How a share price is set
For every share, the exchange keeps an order book: a list of everyone who wants to sell and everyone who wants to buy, each with a price and a quantity. A simplified example:
| Side | Price | Shares |
|---|---|---|
| Sell | $50.30 | 400 |
| Sell | $50.20 | 250 |
| Sell | $50.10 | 100 |
| Buy | $50.00 | 300 |
| Buy | $49.90 | 500 |
| Buy | $49.80 | 200 |
The lowest price sellers will accept ($50.10) and the highest price buyers will pay ($50.00) are the two prices you see in your app. The gap between them is the spread.
Example
What happens when someone buys 150 shares at market?
They take 100 shares at $50.10 and 50 at $50.20. The last price becomes $50.20.
Nobody “decided” the price: an impatient buyer accepted the sellers’ offers. When many people want to buy quickly, they work through ever pricier offers and the price rises. When many want to sell quickly, they accept ever lower bids and the price falls.
Check yourself
Using the order book above, someone sells 400 shares at market. At what price does the last part sell?
How sure are you?
The sale fills the best bid first: 300 shares at $50.00. The remaining 100 go to the next bid, $49.90. The last traded price drops to $49.90.
Myth or fact?
“If a share price rises, there must have been more buyers than sellers.”
This exercise is in the free account, where we also save your progress.
Create a free accountThe world’s largest stock exchanges
| Exchange | City | Well-known companies |
|---|---|---|
| NYSE | New York | Coca-Cola, JPMorgan, Visa |
| Nasdaq | New York | Apple, Microsoft, Nvidia |
| Euronext | Paris, Amsterdam, Dublin and others | LVMH, ASML |
| London Stock Exchange | London | Shell, AstraZeneca, HSBC |
| Deutsche Börse (Xetra) | Frankfurt | SAP, Siemens |
| Japan Exchange Group | Tokyo | Toyota, Sony |
By the value of the companies listed on them, the largest exchanges in the world are the NYSE and Nasdaq, according to the World Federation of Exchanges.
Check yourself
You buy Apple shares through a UK broker. Where are those shares listed?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat would you do?
You want to buy your first shares. Which market do you start with?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat you learned
- An exchange matches buyers’ and sellers’ orders; you reach it through a broker.
- The price is the last level at which a trade happened, and it rises when buyers are more eager.
- The largest exchanges are the NYSE and Nasdaq; almost all trading is between investors, not with the company.
One more time
The questions you got wrong, asked a different way.
Check yourself
Using the order book above, someone buys 100 shares at market. What do they pay per share?
A market buy takes the cheapest offer: 100 shares at $50.10, exactly the amount available at that price.
You reached the end
Keep what you learned
With a free account we remember your lessons, bring back the questions you got wrong exactly when you need them and keep your streak.
Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: World Federation of Exchanges ranking of exchanges by market capitalisation; NYSE history (Buttonwood Agreement, 17 May 1792); company listings from the exchanges’ websites. The order book is a teaching example.